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The new asymmetry in policy interest rates

R+D CSIC 30 years

In 2009, researchers at the CSIC's Institute of Economic Analysis (IAE) explained to R+D CSIC the dynamics of banks and monetary policy in the context of the 2008 crisis. What has changed since then?

Building of the European Central BankHugo Rodríguez Mendizábal, investigador del Instituto de Análisis Económico (IAE-CSIC), was studying the role of the instruments available to the Eurozone and the European Central Bank to deal with crises. Now, almost 15 years later, we are once again in a situation of economic uncertainty. Has there been any significant change in the monetary policy since then?

The loss of symmetry

Rodríguez Mendizábal's research suggested then that the European Central Bank (ECB) could manage monetary policy better in times of crisis if it broke the symmetry in the interest rates on standing facilities, which are the overnight credits and deposits commercial banks can have with the ECB. This was reflected in a study, conducted together with Gabriel Pérez Quirós of the Bank of Spain, and published in the IMF Economic Review.

When a commercial bank needs liquidity and no institution will give it a loan, explains Hugo Rodríguez Mendizábal, "it has the option of requesting an overnight credit from the ECB, for which it will pay the interest rate of the money plus a percentage". This is known as a marginal lending facility. On the other hand, "if a bank has a lot of reserves and wants to earn some interest, it can make an overnight deposit with the ECB, for which it will get the interest on the money minus a percentage ("deposit facility"). This differential that is subtracted or added was always the same: if the interest on the money is 4%, for a marginal lending facility it would pay 5% (4% + 1), and the benefit for a deposit facility would be 3% (4%-1).

This symmetry was never questioned, says Rodríguez Mendizabal, "it was accepted as an unalterable value". And this has been one of the big changes, when in 2013 the symmetry was broken.

"We argued in our 2008 paper that the ECB had a great tool if it broke that symmetry, but I don't think our paper was what made them change the strategy," he jokes. "The European Central Bank was forced to change when the interest rate on money went down to 0%. For a few years, they didn't want to go further down and go into negative interest rates." The interesting fact, he adds, is that the ECB has maintained this asymmetry because it has realised that it is a good tool for controlling banks' reserves (the liquid balances that credit institutions keep on deposit at the ECB).

"Banks have almost 20 times more reserves than in 2008 and the rate asymmetry is not going to make the reserves to disappear", but now it is an instrument the ECB can use when liquidity returns to pre-crisis levels

Currently, says Rodríguez Mendizábal, "the effects that the asymmetry in the three official interest rates can have on the amount of reserves demanded by banks is insignificant compared to the extraordinary monetary expansion that the ECB has generated over the last 14 years, as a consequence of the successive crises we have experienced since then: the financial crisis, the ensuing recession, the sovereign debt crisis and the Covid pandemic".

"Banks have almost 20 times more reserves than in 2008 and the rate asymmetry is not going to make the reserves to disappear". In any case, this asymmetry is now included in the arsenal of instruments the ECB can use when liquidity returns to pre-crisis levels.